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The article documents a well-known fact: Since the 1980's, returns on US financial assets have become disconnected from underlying economic performance and cor
by cs702 5y ago
The article documents a well-known fact: Since the 1980's, returns on US financial assets have become disconnected from underlying economic performance and corporate profits. The question is, why?
No one knows for sure -- by which I mean, a lot of really shrewd, smart, knowledgeable people disagree about the reasons. At one extreme, there are those who feel nothing is wrong, because they believe we're on the cusp of a shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. At the other extreme, there are others who think the current arrangement is a result of regulatory capture by the wealthy, at the expense of everyone else. There is no consensus as to why.
The author posits one possible explanation: Judging by trends in corporate behavior, financial market incentives, government regulations, and federal reserve policies, the US economy has become increasingly organized around maximizing asset values and returns on capital independently of growth. Decisions everywhere are now being made, or not made, based mainly on whether they impact asset prices and returns on capital.
In my view, it's not a bad explanation.
- boppo1 5y ago>No one knows for sure Asset purchase programs and keeping interest rates low are a really really good guess.
- cs702 5y agoThere's no disagreement about the fact that the Fed is buying bonds to keep rates low. But why are they doing that? Is it the right thing to do? What's the underlying motivation? That's where a lot of smart people disagree. Please don't take phrases out of context.
- JackFr 5y agoHe makes a pretty compelling case for this - that corporate hurdle rates are too high and disconnected from the cost of capital. The stock market rewards firms who return profits to shareholders rather than reinvesting them in (not necessarily) risky enterprises. The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go? (Also cheers to the author who refreshingly avoids sanctimonious moralizing about share buy backs.)
- jamesknelson 5y ago> The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go? This was my main question from the article too. After thinking it through for a bit though, I think the answer may be related to the large and increasing US trade deficit. In short, the money goes to the actually growing economies of East Asia and other parts of the world. If not in exports, then in ownership of future cashflows from American businesses. American workers send their money overseas in exchange for cheap goods, which foreign powers then use to purchase control of those workers' future labor via ownership of American companies. There's no such thing as a free lunch.
- nerdponx 5y agoIs it as simple as foreign companies purchasing control over American labor? Surely they have other things to do with that money.
- fxtentacle 5y agoBuying parts of London through offshore shell companies?
- maccolgan 5y agoMaybe investing in the Vancouver real estate market.
- nerdponx 5y agoHow hard is it to actually follow that money, from a data perspective? I know public companies have to publish some finances, but I assume there are ways of keeping the "secret sauce" out of the public eye.
- jseban 5y agoYeah the fact that valuations of stock prices is flexible, up to the market, and changes over time is definitely a feature and not a bug. I also see it as a good thing to organise the economy increasingly around innovation and less around growth, makes perfect sense to me, seems like a natural consequence of more automation.
- macanchex 5y agoBanks create money mainly to lend against assets in place (real estate, corporate takeovers and privatization of public infrastructure monopolies), not to fund new tangible capital investment and hiring. The result of such lending is to bid up asset prices.